Finding and Contacting Buyers

One of the first steps before you go to market is to compile a potential buyer list. Once you’ve identified the group of buyers most likely to purchase your company, your M&A advisor will reach out directly to this list of curated buyers and send them a teaser profile on your company to pique their interest. The confidentiality of your business is maintained throughout the process because the teaser profile doesn’t disclose your company’s identity.

M&A advisors call this a private auction. You will need to have a large buyer list in order to create the spirit of competition necessary to conduct a successful private auction, which will generate the best return for your business. As I’ve mentioned before, the success of any auction is directly proportional to the number of qualified participants. 

The Buyer List

A buyer list is key to maximizing your price. The more qualified buyers who are competing to acquire your company, the higher the price you will receive. At Morgan & Westfield, during our preliminary conversations with clients, we ask them who may be interested in buying their company. Many business owners name five to ten potential buyers and then draw a blank when asked to expand the list. Often, most of these initial five to ten buyers are either too small or too large to be suitable candidates. As a result, there may be only two to three potential buyers to approach. In most cases, this list isn’t large enough and puts the owner at a great disadvantage when trying to sell their company.

When you engage an investment banker or M&A advisor to sell your business, one of their initial tasks is to prepare a list of potential acquirers – ideally containing between 100 and 200 potential buyers. That being said, it’s helpful if you prepare a preliminary list of companies you believe may be suitable candidates. You know your industry best and are in the most suitable position to compile the initial list. Your advisor can then expand the list and research contact information for any companies you’ve provided or that they’ve discovered. 

While it’s possible to sell your company with a small list of buyers in certain instances, it’s important to create as many options as possible to maximize your purchase price. A list of at least 50 buyers is necessary for most companies – between 100 and 150 names is even better. The preferred size of the list depends on the type of business and your industry. An ideal roster should include at least 50 to 100 names. Smaller lists may sometimes be sufficient if the interest level of the names on the list is high or if the companies have aggressively pursued you in the past.

In most cases, a list of 100 to 200 buyers is necessary to produce the 30 to 40 conversations required to receive 5 to 10 letters of intent.

Preparing the Buyer List

Consider buyer size and fit, as well as what the likely buyers for your business will value most, before compiling your buyer list. Prepare a spreadsheet with two tabs – one for potential buyers and one for potential sources of buyers. I recommend first researching direct competitors, then any indirect competitors, and finally any companies in related industries. The buyer list should contain the following columns: 

• Company name
• Contact name
• Website
• Contact information
• Number of employees, if known
• Revenue, if known
• Completed acquisitions
• Potential synergies

Check to see if the company has recently made any acquisitions. If so, take note of any details of transactions you’re aware of, including the industry, name of the company, and size. Your spreadsheet should also contain a list of the sources for your research and any relevant contact information. 

Preparing this list in advance maximizes your chances of success. By planting this seed in your mind early on, you’ll take notice any time you stumble upon a potential buyer that might make a good candidate. When you do, simply add them to your list. The larger your list, the higher your chances of maximizing your price. Not only should the list be large, but the buyers on the list must be targeted. Your list should contain buyers who are not only in a position to acquire you, but who are also a good fit in terms of both size and product or service mix. Your list can also include sources of information that you can use to prepare the buyer list, such as industry directories, publications, and events.

Your list doesn’t need to include financial buyers unless the financial buyer owns a portfolio company in your industry. Your M&A advisor or investment banker will have access to databases of private equity firms and will be able to research which firms are active in your industry. Your list also doesn’t need to include any individuals because these buyers can be reached through general advertisements in targeted publications.

Preparing for a Private Auction

A key aspect of preparing an extensive buyer list is the ability to court several buyers at once, thereby creating a private auction. If you wish to maximize your price, it’s necessary to produce a carefully orchestrated frenzy of activity through a private auction. You need a large list to do this. In most cases, a list of 100 to 200 buyers is necessary to produce the 30 to 40 conversations required to receive 5 to 10 letters of intent.

It’s only through this competitive bidding process that you maximize the price. The more LOIs you receive, the higher you drive up the price. If buyers realize they’re the only one negotiating with you, they’ll know they have you pinned in a corner. Not only will you receive a lower price, but you’ll also be susceptible to renegotiations during due diligence because you’ll be in a weak bargaining position.

The Ideal Corporate Buyer

When preparing your buyer list, what should you be looking for? In this section, I’ll describe the key characteristics of the ideal corporate buyer.

Synergistic

The companies on your list should offer products or services complementary to yours, sell to the same customers, or sell through the same distribution channels as your company. In other words, there should be some synergy between your company and the buyer. These complementary aspects accomplish two important objectives:

1. They give the acquirer sufficient motivation to complete the transaction.
2. They offer the possibility of synergies, which can drive the price up. 

Acquisitive

When deciding who to approach, it’s advantageous to consider who is most likely to acquire your business and their specific motivation for doing so. An ideal buyer has acquired multiple companies and demonstrated the ability to actually complete transactions – not just talk about completing transactions. The more acquisitions the corporate buyer has made, the more likely they are to buy another company. Consider how many acquisitions they have made in the past. What prices have they paid? How common are acquisitions in your industry? While it’s still a feasible strategy to approach buyers who have not made acquisitions, your chances are significantly higher with any buyer who has demonstrated a strong preference for pursuing inorganic growth.

Size Matters

The buyer should be at least three times the size of your company. Most smaller companies aren’t ready, willing, or able to spend millions, or tens of millions of dollars to acquire a competitor. There are exceptions, but in general, only mid-sized and larger companies grow through acquisitions. Be particularly wary of smaller companies that contact you. Why? Smaller companies tend to be busy putting out fires and chasing the next big customer rather than proactively creating a team focused on developing and executing an acquisition strategy. If you started your company from scratch, perhaps you can relate. Smaller companies typically grow organically by slowly increasing their marketing and advertising budgets. They don’t have large enough cash reserves to pursue acquisitions as a growth strategy. Attempting to sell your business to smaller companies is, therefore, an ineffective strategy that can waste an enormous amount of time and risk a leak in confidentiality. While these deals sometimes happen, the ideal buyer will be at least three times your size. 

Bear in mind, when it comes to the size, the buyer should be big enough, but not too big. If the buyer is too similar in size to your company, they will often be too risk-averse, and the transaction may represent too much of a gamble for them. The larger the buyer, the less risk the transaction represents, and the more likely they are to pull the trigger. 

The primary criteria larger companies use to determine if an acquisition makes sense is EBITDA. These companies usually have a minimum EBITDA requirement that must be met before they’ll consider the acquisition. Why? The answer is simple – it takes just as much in resources to complete a $5 million deal as it does to complete a $50 million deal. And, the professional fees involved in an acquisition are similar, regardless of the size of the transaction. As a result, the percentage of fees decreases as the deal size increases, so it’s often more cost-effective to complete larger acquisitions.

For example, a $5 million deal may command fees and expenses of $200,000, or 4% of the total transaction size, while a $50 million transaction may command fees of $300,000, or 0.6% of the total transaction size. The percentage of fees and expenses decreases as the size of the transaction increases. As a result, doing larger deals is more cost-effective. A company must invest in 25 businesses – each having EBITDA of at least $1 million per year – to have the same impact as buying a single company with EBITDA of $25 million. So, buying larger companies is more efficient, both from a cost and time perspective.

While no magic number exists for determining the right size, the acquisition of your business should also be able to move the needle for the buyer. If you own a business generating $1 million in revenue, approaching companies generating $500 million in revenue is less likely to work than approaching smaller companies. As a result, most buyers focus on acquisitions that are 5% to 20% of the size of their companies. If the acquisition is unlikely to make a dent in their business, they’ll be unlikely to consider it. Yes, there are exceptions, but you shouldn’t count on exceptions for one of the most important transactions of your life. This truth applies to both corporate buyers and financial buyers, such as PE groups. 

Imagine if you were purchasing a company similar in size to your own. Get out your checkbook and write yourself a check for exactly what you want to sell your company for. If you want $50 million for your company, write yourself a check for $50 million. Now, imagine writing a check of that size to acquire one of your competitors. Do you have the guts to make the leap?

Now, try the same exercise, but cross a few zeroes off the check. There’s no doubt you’ll still be careful, but your appetite for risk will have increased. The same holds true with buyers in the real world. I see far too many entrepreneurs in sole negotiations with one buyer – and that buyer is the sole owner of a company similar in size to their own. In most cases, the owner can’t stomach the risk and will seek to offset it by a large earnout or by driving the price down. After many months of negotiations, the owner is often terribly disappointed when they receive a low offer that consists of little cash down with a majority of the purchase price paid as an earnout. If you’re desperate and not looking to maximize your price, such a strategy can work. But, if you want to receive the highest price possible, it’s important that the buyers on your list are the appropriate size and that the acquisition of your business doesn’t represent a significant amount of risk for them.

Here’s another example illustrating the importance of size when it comes to acquisitions:

In 2019, Blackstone raised the largest-ever private equity fund of $26 billion. If the average transaction size were $10 million, in order to invest their $26 billion, Blackstone would have to complete 2,600 acquisitions over a five-year period ($26 billion / $10 million = 2,600 acquisitions). To reach that target, they would have to complete two acquisitions per day, assuming 250 workdays per year or 1,250 days over a five-year period (1,250 days / 2,600 acquisitions = 2.08 acquisitions per day). Given that a typical private equity group considers 100 companies for each acquisition they make, they would have to consider 260,000 potential acquisitions to complete 2,600 successful acquisitions. In other words, they would have to consider 208 potential acquisitions per day. This obviously isn’t feasible. It wouldn’t be practical for a large private equity fund to consider acquisitions of this size because they would have to complete more acquisitions than would be possible. 

This is a long-winded way of telling you not to bother approaching Blackstone if you wish to sell your $10 million company.

Obtaining Contact Information

Once you’ve prepared your list, it’s time to compile contact information on the buyers. Ideally, the buyer will have a corporate development department. The corporate development department will oversee acquisitions and will often have information on their website regarding the types of acquisitions they prefer to make. Companies with corporate development departments are active acquirers and are much more likely to pull the trigger than a passive acquirer that lacks such a department. 

For larger companies, another alternative to attract the attention of a potential acquirer is by contacting the manager of a division whose dominion could benefit from a complementary product like yours. I call this individual an “internal champion.” Not only should the company be sufficiently motivated to complete the transaction, but the individuals involved in the transaction should be, as well. So, in addition to preparing a list of potential buyers, your list should also include the names and contact information of people in those companies who have decision-making power and who can personally benefit from the acquisition.

Other Ways To Find Buyers

An alternative to approaching buyers directly is marketing in publications such as trade magazines. The risk of this strategy is a leak in confidentiality, so it should be carefully considered before you implement it.

Here are the types of publications that might be suitable for marketing your business:

• Trade publications
• Publications that target potential buyers for your business, such as medical journals for a medical-related business
• Publications whose readership consists of your target market

There are many other contacts you can reach out to in order to broaden your marketing strategy. These professionals are in contact with potential buyers in your industry on a regular basis. Keep in mind that if you establish a relationship with any of these professionals and it results in a successful sale, it’s best to compensate them for their facilitation. Here are a few professionals who may have a buyer in mind:

• Accounting and Legal Professionals: Close advisers such as lawyers and accountants get to know the business owners they work with and may be able to connect you with their clients or someone in their network. Most firms have specialized groups in focused industries. You want the information for the group that specializes in your industry. 
• Consulting Professionals: These people are often in close contact with senior executives at mid-market firms and can be in a terrific position to connect you with buyers. When you’re contacting a professional at a consulting firm, attempt to reach the most senior-level contact possible. Research their portfolio and industry specialties, and approach them with a professional introduction that clearly indicates why you’re contacting them. 
• Industry Associations: In your local community, in your state, and nationally, there are likely multiple associations for professionals in your industry. These organizations connect people in the same and overlapping businesses and bring them together through online forums, trade shows, events, and industry-specific publications. Learn the names of the major associations and gain membership if necessary. Reaching out to other members, advertising within the organization itself, or participating in an event could connect you with a range of potential buyers. 
• Active and Retired Senior Executives: Current or retired executives in your industry often have extensive networks and may be less conflicted about recommending potential buyers. Using your knowledge of your industry, both local and widespread, consider contacting executives who may be able to refer you to others in their network or who may be potential buyers themselves.

Conclusion

Keep in mind this critical point – know your buyer.

Want to get ahead of the game? Know your buyer. Want to maximize your return? Know your buyer.

Knowing who your probable purchaser is will help you determine the steps you need to take to prepare your business for sale and determine the ideal marketing strategy to maximize your company’s value.

If you’re most likely to be approached by an individual buyer, for instance, you’ll want to focus on minimizing the perception of risk. If you expect to sell to a private equity firm, start building a strong management team if you don’t already have one. If you’ll be looking for a corporate suitor to come knocking, be sure to build value in your company that can’t be easily replicated.

Then there’s the buyers’ list – a mini database assembled by you and your advisors of names, numbers, and background information of companies that might be interested in what you have to offer. The bigger the list, the better, as the idea here is to create a private auction. Once a potential buyer realizes they’ve got competition for something they want, they’ll likely be more willing to pay up. Keep in mind how the numbers shake out: a list of 100 to 200 buyers is necessary to produce the 30 to 40 conversations required to generate 5 to 10 letters of intent.

Let the bidding begin.